In the first ever case in which a corporation has been found liable for insider trading, German construction company Hochtief has been fined A$400,000 for insider trading and required to make donations to the Australian Shareholders Association and First Nations Foundation.
This is also the first case where the market itself was expressly recognised as a victim of insider trading.
The Federal Court’s decision coincides with the Senate Inquiry into the adequacy of penalties for white collar crime. Insider trading is a complex, controversial offence with a reputation for being under-detected and under-prosecuted, but the Hochtief case recognises that significant penalties are appropriate to protect markets.
What is insider trading?
Insider trading occurs when a person or company trades in a financial product (such as shares) while they possess price-sensitive information that is not publicly available.
The Hochtief case is a set of civil proceedings arising from the 2014 takeover of Leighton Holdings. At the time, a number of Hochtief executives held positions on Leighton’s board and had access to inside information concerning Leighton’s financial results.
Because those executives possessed this information when Hochtief was purchasing Leighton shares, Hochtief was considered to possess inside information and to have engaged in insider trading, in breach of the Corporations Act.
We are all victims
Insider trading is not a victimless crime. The person on the other end of a trade with someone who possess inside information is potentially missing out on a profit or the opportunity to avoid a loss. They are a victim of insider trading.
But Australians collectively have more than A$2.1 trillion invested in superannuation funds, of which about 20% is allocated to publicly traded shares. This means almost all of us are shareholders in some form, even if we don’t directly trade on the stock exchange. We could all be unknowing victims of insider trading as a result of the trades undertaken on our behalf by our superannuation funds.
But there is also another victim - the market itself. If investors believe that share trading is weighted in favour of insiders, and that only insiders can profit from trades, they lose confidence in the integrity of the market. This means investors are more likely to seek investments outside the stock exchange, withdrawing their capital from the market.
So insider trading can reduce liquidity and increase the cost of capital for all companies and investors. Almost all countries with well-developed securities markets prohibit insider trading. In countries that don’t, or are perceived to have lax regulation or enforcement, the cost of capital is greater and the level of investor participation lower.
The Hochtief decision
That the market is a victim in this case was emphasised by Justice Wigney of the Federal Court:
It resulted in significant trading in a major Australian public company which, because it involved insider trading, had the capacity to significantly undermine the integrity and efficiency of the relevant securities markets. It was by no means a victimless crime: the victim was the market.
The fine of A$400,000 was less than the maximum civil penalty of A$1,000,000, in recognition that while the case involved significant trading, it was inadvertent and not the most serious breach imaginable. However, in cases of more egregious breaches, A$1,000,000 is not a large fine for a publicly listed company with significant resources.
Due to its nature, insider trading is extremely difficult to detect and prosecute. Accordingly, it is appropriate to consider increasing the civil penalties available for insider trading, to an amount more likely to deter such conduct and to encourage corporations to limit opportunities for insider trading.
It is encouraging that the current Senate Inquiry is focusing on penalties for insider trading and other white collar crimes. We all benefit from a fair, efficient securities market with its integrity protected and maintained.